Crossover: Lessons going from Private Equity Real Estate to Venture Capital

You might be surprised how much overlap there is between commercial real estate private equity and venture capital.

I’ve started collecting some notes and thoughts on the best practices I carry over from CRE PE to VC and I thought I would mention some of them here.

At first glance, you might think that investing in one of the oldest, most quantifiable assets in the entire investment arena would have very little in common with investing in risky startups. But that hasn’t been my experience.

I’ll start with three lessons to keep this brief and I’ll probably write a second article as I formalize my thoughts. (Feel free to request a topic in the comments.)

First — Investing is a process and it isn’t sexy.

Too many people watch Shark Tank and think that’s how you invest in startups. It isn’t. At least, not at sophisticated VC firms.

There is a process and cadence to identifying and mitigating risks in all asset classes, startups included.

Just like finding property sales comps, interviewing tenants, and stressing a proforma, this diligence is extremely detailed and arduous.

We take weeks of diligence, research, competitor analysis, customer interviews, cap table projections, etc. When startups ask me how much data I need on their company, the answer is — all of it.

We have painstakingly formalized our underwriting template. We have formalized our deep tech diligence. We have formalized our interview questions with the people around the company.

As with any investor, we are constantly refining and improving our processes and assumptions because data always beats experience in the long run.

I wouldn't call deep competitor analysis sexy. Same for cap table iterations and dilution projections. It isn’t great material for TV but it is crucial in identifying and mitigating our risks.

Second — Specialists win in the long run.

30 years ago, you could just be a “developer” or “real estate investor.” Now if you don’t focus on “Value-Add and Opportunistic ‘B’ Multifamily in Secondary Markets in the Northwest” you will get trounced on deals by the firm who does. With the influx of human and financial capital into CRE PE creating extreme competition, the industry has become hyper-nichified (I can make up words if I want). You might win a deal or two, but if you want to enjoy scalable success that’s really the only way in 2018.

Same applies to VC.

I run across generalist investors and angel groups all the time who have done 1/3rd of the diligence we are doing and they have already invested. Of course we see things they miss. Of course we ask questions they don’t think of because we know the space better than they do.

That will get us into the 20% of deals that they won’t or can’t.

(**Side Note — It isn’t clear yet whether recent-vintage funds need to focus specifically on a niche like BuiltTech, for instance, or if stage focus is sufficient. The publicly available data about VC fund-performance isn’t robust enough for a call on that yet. Somebody at Cambridge Associates give me an opinion on that!**)

Third — All that really matters is people.

There’s an old saying in CRE that “You can’t do a good deal with a bad partner”. The idea is that in the acquisition and development process, something stressful will always pop up (delays, cost overruns, tenant disputes, NIMBYs, whatever) and test the relationship. Good partners will behave ethically and communicate well. Bad partners will slowly burn everything to the ground.

Same happens with startups.

Maybe this is just specific to the stage I look at, but you HAVE to be a people-first investor. Can you think of a large, successful tech company that is exactly the same strategy/product today as it was when it was founded?

Me neither.

Companies pivot, transition, and shift. Most more than once.

Then, by definition, betting purely on the concept is trying to hit a moving target. Prudent investors bet on the team and their ability sell, incorporate feedback, iterate, and grow.

Tech can be fixed. Bad teams are fatal.

Those are my first three. I have a handful more that I am working on verbalizing.

If you have any thoughts or questions, drop me a line.